“The Gift That Keeps on Giving”

In most cases this is a phrase we use to describe an item we receive from someone that we don’t consider to be anything but a gift. In some cases it describes a gift we receive that we don’t want and we just “re-gift” to someone else. I still remember the old Seinfeld episode about the label maker. I am very excited that I have finally discovered the gift that does keep on giving. Being a mortgage banker recently provided me with a rare opportunity to assist some in receiving that gift.

I recently began the pre-approval process with a young married couple, Jed and Lindsay. Jed and Lindsay, like many other first-time homebuyers had some money saved but it paled in comparison to the significant financial investment required to purchase a home in California. Initially, they were hoping they could depend on one of the many down payment assistance programs provided by the state of California to bridge the gap. As we continued to explore their options, we determined their income was too great to meet the qualifications for most of the programs available. The lack of funds continued to be a major challenge for them. They could elect to put the search on hold and wait until they saved enough to cover all the funds required, but this would run the risk of losing buying power due to increase in rates and home values.

Being the problem solver that I am, I was able to present them with a few different scenarios, but none that would allow them to meet all of their goals. One day I received a call from Jed inquiring about a gift of equity. Jed informed me that he and Lindsay had been renting a room from Lindsay’s mother to reduce expenses and save money to purchase a home of their own. Lindsay also informed me that her mother was looking to sell her property and downsize for retirement. This discovery turned out to be the perfect storm for both Lindsay and her mother.

Let’s recap! Jed and Lindsay are looking to purchase a home and are short on funds for the down payment and closing costs. Simultaneously, Lindsay’s mother, Margaret, is looking to sell her home and downsize to save money. Wouldn’t it be great if Margaret could somehow sell her home to her daughter and use some of the proceeds from the sale to provide her daughter with funds needed to buy the very home she is selling? That is exactly what Margaret was able to do through a great opportunity known as a gift of equity.

Here’s exactly how the process worked. Margaret owed a balance of $215,000 on her current mortgage, but through an appraisal we were able to determine that the property was valued at $280,000. Margaret sold her home to Lindsay and Jed for a purchase price of $270,000. Pam agreed to gift $10,000 of the proceeds to Lindsay from the sale of the property to be used toward the down payment and a few thousand toward closing costs. This was a win/win for everyone involved. Instead of receiving a check for $75,000 after the sale of her house, Margaret received a check for approximately $65,000 because she provided a gift of equity to Jed and Lindsay of $10,000. Jed and Lindsay only had to cover some of the closing costs from the purchase, which were less than $8,000. I know what you’re thinking, but it gets even better. This process is what’s known as an arm’s length transaction and did not require real estate agents on either side of the transaction. This allowed them to eliminate up to 6% in agent fees. They were able to rely on escrow instructions in place of a sales contract. The escrow company is already a standard costs in the purchase process anyway. Lastly this type of transaction allows for the opportunity to be grandfathered in to the lower property tax rate that the previous owner was paying.

The equity gift provided by Margaret allowed Jed and Lindsay to achieve their goal of homeownership when they could get the most out of their buying power. Both parties were also spared the frustration of the process of buying and selling a home as well. Margaret was spared the parade of strangers trampling through her home weekend after weekend. Jed and Lindsay were able to avoid the tour of homes week after week and the roller coaster of emotions accompanied by the highs and lows of finding a dream home and having the offer not be accepted. The process was actually a lot simpler than what homebuyers typically experience. When Lindsay was asked to describe the process she assessed that, “We were able to do most of the paperwork over email. Responses to phone calls and emails were made quickly and all of our questions were addressed.”

Not everyone is fortunate enough to have the opportunity to take advantage of an equity gift, but many are unaware that the opportunity even exists. Ironically, even many mortgage bankers are unaware this type of program exist; I know I was the first time I encountered it. The financial benefits of homeownership have been well documented and so this is literally the gift that keeps on giving. Next time you are speaking to a relative who is planning on selling their home, you may want to present this idea to them. It just may just be the best thing to happen to the both of you.

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